Means to an end?

Means-testing will remain an issue for auto-enrolment even if Steve Webb’s flat rate pension makes it to the statute book. John Lappin assesses the communication challenges employers and advisers will face

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No analogy is perfect, but we know the process will take four years from 2012 and 2016, and when it gets to firms with less than 50 employees, the times are staged over many months depending on the last two digits of the payroll numbers, affecting employees over 22 earning £7,475.

But like overambitious fun runners trying to complete 26 miles without the training, should some savers on lower incomes be dropping out for their own good?

How easy will it be to inform lower earning employees about the possibility that their pension will not be huge when they reach retirement, while not falling foul of regulations that say employers must not actively promote the opt out?

Bluefin Corporate Consulting head of technical marketing and research Robin Hames says: “You have to be careful. The inducement issue is there. Quite clearly within the legislation, it is said you can’t take actions where the principle aim is to induce people to opt out.

Employers are nervous around where the line sits between information and advice.”

A spokesperson for The Pensions Regulator says: “Inducement activity represents a significant risk to employees. The Pensions Regulator has been given the power to take action against inducement activity, and these powers extend to breaches by third parties as well as employers.

Inducement activity represents a significant risk to employees. The Pensions Regulator has been given the power to take action against inducement activity, and these powers extend to breaches by third parties as well as employers

“We will work closely with the Financial Services Authority, who regulate the provision of financial advice, to ensure that advisers and intermediaries are aware of the risks around inducements and understand the implications of acting of any breaches.

“The regulator will be producing guidance on inducements in early 2012. This will follow a public consultation on our approach to enforcement later this year.”

Hames says the answer will be in segmented communication, and that will be the case for most Bluefin clients.

“You start segmenting the membership and you send different communications and different messages in different ways. From a consultancy point of view, you need to get the right messages across. Equally you can get the message to employees this is only a starting point and you need to take more responsibility,” he says.

Jelf head of benefits strategy Steve Herbert believes that particularly if Nest is selected as the pension, beyond some basic projections which may be available online, it will be very difficult for employers to offer any information or view. He says: “I don’t think anyone is going to go out on a limb unless they bring in advisers. Anyone else almost can’t do it because of soft coercion.”

Herbert believes some large employers might bring in advisers but this will be less common amongst SMEs.

Hames adds that with the abolition of the default retirement age, employers could also face the issue of employees not wanting to retire because they feel they can’t afford to.

“If a firm can’t afford high levels of contributions, then investment into information and guidance is a valuable investment. It helps to raise awareness that the levels as they currently stand aren’t likely to produce huge pensions in retirement,” he says.

The fact that the DWP doesn’t have the budget to get the public awareness is quite worrying

Standard Life head of pensions policy John Lawson is hopeful that the Government will grasp the means-testing nettle to make things much easier.

“It is difficult for anyone to go there because then you are entering the realms of advice. We hope the DWP paper and pensions minister Steve Webb talking about a higher state pension will resolve the issue and the means-testing stuff will go away. Then you can give the simple message, it is worth your while saving.”

One of the most ardent critics of means-testing, managing partner at Paradigm Pensions, Steve Bee is optimistic about Webb’s planned reform and hopes “we can take what is being said at face value”.

That said, Webb had said a consultation on the flat-rate pension of £140 a week would be published by the end of last year. So far, no prediction of when the paper will see the light of day has been given, and some industry experts believe the project has been kicked into the long grass, either by the Treasury or because of the perceived complexity of unravelling state second pension and contracted out benefits.
Bee would be very pessimistic if the state pension reform got lost in red tape and means-testing continued.

“If people can lose out from saving, and they are auto-enrolled, you will have a run from the moment you tell them. It would be irresponsible, but I think the Government people understand that,” he says.

But Herbert says relying on state benefits is, if anything, an even worse idea today because of the economic climate.

Herbert says: “It is not more of a problem than it has been for company schemes anyway. My argument was and is, it is much better to have the income coming to you and not be reliant on means-tested benefit. They can change the rules and with the current economics, they are changing the rules at a whim, but when it is your pension, it’s your pension. “

AWD Chase de Vere principle consultant Sean McSweeney sees one overlooked problem arising from the reforms – the need for an employee contribution to make up the minimum 8 per cent, in instances where the existing scheme is non-contributory for employees. He says one of his clients currently pays in 6 per cent but is concerned the employees may opt out if asked to pay contributions. Then again, he says, some employers are considering paying these contributions too by upping their own contribution overall which is allowed under the rules.

McSweeney sees a problem with opt-outs not at the start but when the scheme is up and running. “There will be a problem with employees getting their statements in 12 months, and having a paltry amount. It is difficult for us as an advisory firm particularly if you believe the Government will continue with means-testing.”

He says this could affect firms such as large retailers which will be opening their pension schemes to part-timers who work very few hours.
However, he feels the RDR provides a further challenge and arguably a bigger one than Nest. His current conversations with employers are getting them to concentrate on what is the overall reward package.

But he says from the firm’s point of view, it is less a case of justifying things with clients and employers and more of an RU64 type of issue.

“It will make it more difficult to have universal access. At the lower level you will use Nest, for a higher level, you can justify investment at a higher cost or the employer will pay for more,” he says.

For some parts of the market and workforce, he sees a definite difficulty with lack of advice.

McSweeney adds: “I can see areas where people will not get advice and close to retirement will realise they haven’t got very much”.

He contrasts that with the current market, where he says people usually benefit from monitoring, information and advice that lets them know how their pension is doing much earlier.

The RDR discussions fit in the context of corporate advisers aiming to convince clients to do something early rather than simply complying with regulations, so that they can actually fit it into a broader benefits strategy.

Herbert says: “For most companies, they are not looking at auto-enrolment till autumn 2013 or spring 2014. It gives them a comfort zone but it is not that long. That is the point we are trying to get across. Nest goes live this year, albeit on a voluntary basis, auto-enrolment next year, but one thing that is driving the conversation, is the realisation that commission, which this group relies on to pay their advisers will stop. If employers are going to do something and avoid that cost, now is the time to do it.”

However Standard Life sees the RDR as an opportunity as it will level the playing field with providers that are still paying high commissions for GPPs.

“For us, auto-enrolment and the RDR happening at the same time, is a positive thing to get back into that market that Aegon, Aviva and Scottish Widows currently dominate.”

For most though, the big communications issue is not with employees but employers. An Aon Hewitt survey conducted late last year, showed 23 per cent of 480 employers had not factored auto-enrolment into their plans. More worryingly, an Association of Consulting Actuaries survey last August found that only a fifth of 404 smaller employers had factored auto-enrolment into budgets.

Lawson believes that employers have been reluctant to do anything because of the financial crisis and subsequent recession though those that are realigning their businesses or their pension provision in general are taking the opportunity to prepare for auto-enrolment.

Herbert says there has been a big upturn in interest recently with the number of finance directors attending his talks on the increase. Most consultants feel that clients who already offer pension saving vehicles will not be looking at Nest but will aim to have a better qualifying scheme, though some will offer split coverage. Indeed, the number of schemes which opt for Nest is very difficult to gauge.
Lawson says he recently spoke at an employer meeting attended by hundreds of employers where no one, in a show of hands, planned to use Nest as a main or supplementary scheme.

McSweeney says there is an assumption that most employers that don’t have existing schemes employ low earners will. However some sectors that have paid well but haven’t traditionally embraced pensions – most notably hedge funds and some recruitment consultancies – may start to offer very high quality pension schemes now that they have to offer a scheme and contribute to it. The picture is complex.

But Bee thinks that many employers will be daunted by the issue and the regulations and that will be a huge opportunity.

He says: “If you have got 150 people who work for you and you have 80 in your pension scheme, it is not hard for the regulator to look at those two facts, and ask, can you show us the record of those 70 people, their experience?  Can you show it was done in a compliant way and have you got the records you are required to keep for six years. We would like to see them please? What do employers do when they are asked those questions? That is a hell of a spread sheet.”

Bee believes his firm and others will be able to meet that need. But he is concerned at a lack of DWP campaigning to raise employer awareness.

“The fact that the DWP doesn’t have the budget to get the public awareness is quite worrying. For a major half century shift in pension policy at a fundamental level, there ought to be a massive advertising campaign aimed at employers. Businesses have got to have it in their three to five year business plans. How can you do that if you haven’t heard of it?”